Some reasons for the existence of real bills

Abstract

It is profitable to accept a bill as long as dishonouring probability of the bill is less than the ratio of operating income to sales, which is supported by empirical observations. Also accepting bills tends to establish high quality customer relationships, thereby increasing the long-run profits and decreasing their variability.

Acknowledgements

This study was financially supported by Chonnam National University in the 2002 program. I am grateful to Yong-Yeop Sohn and Sangho Lee, and the Editor for their helpful comments and suggestions.

Notes

¹ There are two kinds of real bills. Bills of exchange are drawn by commodity sellers and assumed by buyers with buyers' signing it whereas promissory notes are made by buyers and accepted by sellers. Over 95% of real bills having been used in Korea are promissory notes. Although promissory notes have been also used for loan credits without any commodity transaction, those notes are not covered in this study. Since I focus on the promissory notes as real bills in this study, the bill-receiving firm means commodity seller and the bill-issuing firm commodity buyer.

² Bills have been being circulated in Japan in the same way as in Korea. Other historical record shows that the real bills were used in some other countries. For example, Booker and Craig (2002) studied the operation of bills of exchange and promissory notes in New South Wales colony in Australia. They showed that the bills were used under economic situation of shortage of coin and sterling notes, and they were discounted and occasionally dishonoured. Lindgren (2002) showed that promissory notes accounted for more than half of the total credit market in the early 1840s in the city of Kalmar in Sweden. However, the promissory notes were not real bills, but they were used only for credit loans.

³ There are several sorts of real bills depending upon the period a bill falls due, one month-, three month-, six month-bill and so on.

⁴ By the same token, cost of producing the commodity for the sales on receiving a bill should be recognized as an increase in total cost. The same explanation applies to the profits.

⁵ Relaxing the assumption of the profits from each sale being mutually independent will include the covariance term in Equation 8(8), which should not alter the results of the current analysis.

⁶ The analytical framework used in this section bears reference to the work of Kane and Malkiel (1965).

⁷ It is conjectured that the loss tends to increase as the bills are denied of large firms, growing firms, firms with stable sales, firms with longer history of trade and the firms with high quality customer relationships.